Equities Endure Intense Volatility, but the Bull Market Survives
U.S. equities experienced extreme volatility last week. Prices plummeted
on Monday morning due to concerns over slowing growth in China as well
as uncertainty surrounding Federal Reserve policy. The sell-off was likely exacerbated by trading halts, liquidity pressures and systematic investing programs. Markets recovered later in the week as investors viewed conditions as oversold, and as oil and other commodity prices stabilized and advanced. For the week, the S&P 500 Index gained 1.0%.1 The energy, technology and consumer discretionary sectors led the way while utilities sold off sharply.1
Key Points
▪ While we think equity prices may have reached the low point for this cycle, we would not be surprised to see last week’s lows tested further.
▪ Despite souring investor sentiment, the U.S. and global economies continue to improve.
▪ Volatility may remain elevated, but we believe investors should still hold overweight positions in equities.
Weekly Top Themes
1. The revised second quarter gross domestic product report was solid and showed broad-based improvements. Real GDP was revised from 2.3% to 3.7%, while nominal growth improved from 4.4% to 5.7%.2 Nearly all segments of the economy showed improvements, with capital expenditures demonstrating particular strength.2 Additionally, the report confirmed the ongoing trend of domestically-oriented companies experiencing better results than multinationals.2
2. Consumer confidence rebounded in August. The Conference Board Consumer Confidence Index rose to 101.5 this month, marking its second-highest level of the current expansion.3 The increase is a particularly welcome sign for future economic growth since it follows a downturn to 91 in July.3
3. The slowdown in China should boost U.S. economic growth. In particular, we point to a decline in energy prices. U.S. gasoline prices are down 25 cents per gallon so far this month.4 Lower energy prices should boost consumer spending. Similarly, general economic unease has kept mortgage rates low (30-year fixed mortgage rates are now below 4%).4 This should prompt increased spending on housing, which should also help the broader economy.
4. Uncertainty over a potential Fed rate hike in September has increased. New York Fed President William Dudley stated at a news conference that recent market turmoil makes the case for a hike next month “less compelling.” He also indicated that views could change as new data emerges, but a September rate hike could require continued strength in economic data and more stable markets.
5. Last week’s market lows may be tested further. The history of market corrections suggests that “V bottoms” are rare following the type of technical damage done early last week. We would not be surprised to see an additional pullback in the coming days or weeks, but we also think there is a better than even chance that we have already seen the lows for this cycle.
Volatility May Continue, but Sentiment Should Improve
The markets have been in turmoil since the Chinese currency devaluation a few weeks ago, which fueled concerns over the strength of the global economic recovery. A further slide in oil prices compounded these fears. Ironically, these concerns escalated at the same time U.S. growth has been accelerating and Europe survived the latest Greek debt issues. Investors remain uneasy and prone to pessimism. We expect market volatility to remain elevated, even as data suggest the U.S. and global economies are continuing to expand.
Concerns over slowing growth in China are unlikely to go away. Many investors have long awaited signs that China was on the verge of implosion. We are not discounting the real effect that weaker growth in China represents, but we also believe that most observers are overly focused on the downside. The pullback in energy prices, for example, should provide more positives than negatives for the global economy.
Investor sentiment has clearly taken a hit and will take time to recover, but we expect investors will slowly move back into equities. Our view is that we have probably seen the worst of the current corrective action, and we do not believe we are at the onset of a new bear market. Volatility is likely to remain high, and there could be further downturns in the near-term, but we continue to believe it makes sense for investors to hold overweight positions in equities. Our overall view of the current equity market remains unchanged: The bull market is not over, but the easy money has already been made. Gains will be tougher to come by and volatility will be higher, which means that selectivity has become increasingly important.
1 Source: Morningstar Direct, as of 8/28/15
2 Source: Bureau of Economic Analysis
3 Source: Conference Board
4 Source: Cornerstone Macro
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Euro STOXX 50 Index is Europe’s leading Blue-chip index for the Eurozone and covers 50 stocks from 12 Eurozone countries. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Noninvestment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
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